Tennessee Tax Rates

This post provides an overview of the primary taxes levied at the state level in Tennessee. The state’s tax structure is characterized by the complete absence of a personal income tax, a low property tax burden, and a high reliance on a general sales tax. For individuals or businesses seeking comprehensive support with tax filings, compliance, or strategic planning, indinero offers expert services. We encourage all who utilize this summary to explore the tailored tax support available through indinero.

Individual Income Tax

Tennessee is one of the few states that does not impose a broad-based personal income tax.

  • Wages and Salaries: The state income tax rate on wages and salaries is 0.0%.
  • Retirement and Investment Income: All taxes on interest and dividends (known as the Hall Tax) were completely repealed starting with the 2021 tax year.
  • Retirement Income: Income from pensions, 401(k)s, IRAs, and Social Security benefits is not taxable at the state level.
  • Local Income Tax: Tennessee does not impose a local or county income tax.

Sales and Use Tax

Sales tax is the principal source of state tax revenue, and Tennessee has one of the highest combined sales tax rates in the U.S.

  • State Rate: The general state sales tax rate is a uniform 7.00% on the retail sale of most tangible personal property and certain services.
  • Local Taxes: Counties and cities impose an additional local option sales tax that can range from 1.50% to a maximum of 2.75%.
  • Combined Rate: The average combined state and local sales tax rate is around 9.61%, making it one of the highest in the nation. The total combined rate can reach 9.75% in many counties.
  • Tax Cap on Purchases: The local option sales tax only applies to single purchases of tangible personal property up to a price cap (often $1,600). Purchases exceeding the cap are only subject to the 7.00% state rate on the excess amount, which can lower the effective rate on very large purchases.
  • Tax on Groceries: Unprepared food (groceries) is taxed at a lower state rate of 4.0%, plus the applicable local sales tax rate.
  • Exemptions: Key exemptions include prescription drugs.
  • Use Tax: A use tax of the same state and local rate applies to taxable items purchased outside of Tennessee but used, stored, or consumed in the state if Tennessee sales tax was not collected.

Property Tax (Ad Valorem Tax)

Property taxes in Tennessee are collected exclusively at the local level by counties and municipalities, and the average effective rate is among the lowest in the U.S.

  • Assessment Ratios: Property is assessed at a fraction of its market value, with the ratio dependent on the property classification:
    • Residential Property (Primary Residence): 25% of fair market value.
    • Commercial/Industrial Property: 40% of fair market value.
  • Tax Calculation: The tax is determined by applying the local mill rate (set by county, city, and special district budgets) to the low assessed value. The low assessment ratio results in a lower effective tax rate on homeowners.
  • Property Tax Relief: The state provides property tax relief for low-income elderly and disabled homeowners, as well as disabled veterans and their surviving spouses, by reimbursing them for part or all of their property taxes paid, subject to specific eligibility requirements.

Corporate and Business Taxes

Tennessee imposes both an Excise Tax (corporate income tax) and a Franchise Tax (net worth tax) on corporations, LLCs, and other entities doing business in the state.

1. Excise Tax (Corporate Income Tax)

  • Tax Rate: The excise tax rate is a flat 6.5% of the corporation’s or entity’s net earnings or income from business conducted in Tennessee.
  • Apportionment: For multi-state corporations, Tennessee uses a three-factor apportionment formula (property, payroll, and sales), with the sales factor being double-weighted.

2. Franchise Tax

  • Tax Base: This is a privilege tax based on the greater of a taxpayer’s net worth or the book value of all real and tangible property owned or used in Tennessee.
  • Tax Rate: The rate is $0.25 per $100 of the tax base, with a minimum tax of $100.

3. Business Tax

  • Purpose: This is a privilege tax levied by cities and counties on the gross receipts of businesses from sales of tangible personal property and services within their jurisdictions.
  • Rate: Rates vary based on the classification of the business (e.g., wholesaler, retailer) and the municipality.

Unique and Miscellaneous Taxes

  • No Estate or Inheritance Tax: Tennessee does not impose a state-level estate tax or inheritance tax.
  • Motor Fuel Tax: A per-gallon tax is levied on motor fuels, set at approximately 27.4 cents per gallon for gasoline.

R&D Offer Quiz

Step 1 of 3

Answer to find out if you're eligible for R&D tax credits.

Do the activities performed relate to a new or improved business component’s function, performance, reliability, quality, or composition?(Required)
For Example: A mid-sized packaging company develops a slightly modified cardboard box design to improve its stacking strength (reliability) for warehouse storage, involving minor adjustments to the corrugation pattern to reduce collapse under standard weight loads.
Is your company trying to discover information to eliminate uncertainty concerning the capability or method for developing or improving a business component?(Required)
For Example: A furniture manufacturer investigates whether a cheaper wood adhesive can hold joints as effectively as the current one during assembly, testing bond strength to resolve doubts about its capability in standard production lines.
Do the activities performed constitute a process of experimentation?(Required)
For Example: An auto parts supplier runs a series of bench tests on different lubricant formulations to find one that reduces friction in engine bearings more effectively, systematically comparing wear rates over simulated operating cycles.